The board of directors of Ugly Duckling Corp., a chain of used-car dealerships and a finance company based in Phoenix, has approved splitting the firm into two public companies.
After the split, Ugly Duckling will continue to be a used-car sales and finance chain, while the new public company, Cygnet Financial Corp., will originate subprime loans to used-car dealerships not owned by Ugly Duckling. Ugly Duckling finances and sells used cars to people with damaged credit.
Ernest Garcia II, chairman and CEO of Ugly Duckling, said Cygnet's financial success this past year has made it evident the company will be a viable stand-alone enterprise.
'There also exists an opportunity to capitalize on the subprime industry's current turmoil,' he said.
SWIFT BUSINESS GROWTH
Garcia would keep his chairmanship of Ugly Duckling but would spend most of his time expanding Cygnet's business. Greg Sullivan, Ugly Duckling president and COO, would become CEO of Ugly Duckling.
Now that the board has approved the deal in principle, the company must work through structural details with its attorneys and bankers.
Ugly Duckling's used-car sales business has grown rapidly. At the end of the first quarter of this year, the company had 46 stores open in seven states, compared to 14 stores in three states a year ago.
Ugly Duckling's net income from continuing operations rose to
$3.7 million for the first quarter of 1998, from $800,000 a year ago.
That excludes a net loss of
$5.6 million from charges arising from the company's decision in January to close Champion Finan-cial Services, a branch network that purchased loan contracts from third-party dealerships.
Cygnet was formed less than a year ago. Its total loan portfolio is still less than $30 million, compared to Ugly Duckling's managed portfolio of about $390 million.
RISKS AND REWARDS
Cygnet lends money to third-party used-car dealers using loan contracts and other assets as collateral, said Steven Darak, Ugly Duckling senior vice president and CFO. The dealer assumes the risks and rewards of the finance contracts.
'What we've really done is taken the dealer who's almost in a competitive environment and turned them into partner,' Darak said. 'If the contract pays, both parties win under Cygnet.'
William Gibson, a securities analyst for Cruttendon Roth Inc. of Irvine, Calif., said the move is important for Ugly Duckling because it allows the company to seek fair market value for two separate businesses.